Reverse mortgages and other income options

Downsizing and reverse mortgages are good options for those who are house rich and cash poor

  5 Premium content image

by

Online only.

  5 Premium content image

While I personally never expect I’ll need to use a reverse mortgage, the topic keeps coming up. Most recently CBC Lang & O’Leary Exchange host Amanda Lang interviewed MoneySense’s own Bruce Sellery on income generation option. A couple weeks before that, it came up over dinner with a friend.

A reverse mortgage is a loan secured against your house, typically representing up to 50% of its value. As people live longer and house prices rise, it’s becoming an increasingly popular option for seniors who want to stay in their homes while still tapping its equity.

My friend is almost 70, twice divorced, has no heirs and has virtually no savings or employer pensions, except for the government pensions CPP and OAS. These he has already begun to draw from, even though he also continues to work at least part-time. (He’s in sales, so commissions can be sporadic.)

But what he does have, in addition to an average car that’s no longer new, is significant equity in a Toronto townhouse. Whenever we meet, I congratulate him on making for him what was the smartest financial decision of his life. Like most Toronto homeowners who bought more than a decade ago, he’s more than doubled his initial investment.

In effect, he is house rich and cash poor. As he prepares to stop sales work altogether, he’s trying to figure a way to generate a little more income than CPP and OAS will deliver to him. Naturally, the idea of tapping his home for equity appeals to him. This could be done in several ways. If I were him and in the same situation, I wouldn’t go the reverse mortgage route but would downsize. I’d sell and move to a modest condo located on the subway line, enabling me to sell the car and ditch the cost of vehicle ownership. If you don’t need to drive to work because you’re no longer working, that’s a substantial savings. Public transit should suffice most of the time but if you do need to take the odd cab, as I say to another elderly friend, “you can take a lot of cabs for what you pay out each year in car insurance.”

Another downsizing option is to sell the townhouse and leave the big city entirely, finding “twice the house for half the price” somewhere in the country, or a cheaper major city like Montreal or Halifax. Ideally you’d end up with a paid-for rural property, no debt and perhaps $150,000 or $200,000 that could be wisely invested: first to the maximum TFSA limit.

But my friend is very fond of his current house, likes the community and really doesn’t want to move. He’s willing to do what he did when he first bought the home and take in a paying tenant. If ever there were a candidate for a reverse mortgage, it’s him. I told him to research the reverse mortgages online, get hold of P. J. Wade’s book, Reverse Mortgages: Best Friend, Worst Enemy … Your Choice! and find a financial institution or adviser that’s familiar with the topic. The Canadian Home Income Plan (CHIP), which is offered by HomEquity Bank, is the main source of most reverse mortgage products that are available in Canada. You can also speak to your financial institution about other options that may meet your needs.

Remember, I told my friend, a reverse mortgage is exactly that: instead of paying down your interest charges and building home equity, you do the opposite: you’re going more and more in debt, paying higher than normal interest and depleting ever more home equity as time goes on. But you can stay in the home for the rest of your life (health permitting) and if you have no heirs, you may not be concerned about what’s owed on the home when you do die. In the meantime, the extra cash coming in from the reverse mortgage is tax-free, so won’t result in clawbacks of OAS or the Guaranteed Income Supplement.

As Wade puts it, reverse mortgages seem to contradict the old saying that you can’t have your cake and eat it too. In certain situations, such as my friend’s, it seems you can have your home and spin off extra cash from the equity too.

Jonathan Chevreau is the editor-at-large of MoneySense. He blogs here and at findependenceday.com. Find him on Twitter @jonchevreau.

5 comments on “Reverse mortgages and other income options

  1. It really depends on how much equity is in your house ,your age and the totally unpredictable how will your health be?Can you live there until the end or might you need care at some point in a nursing home.Then the reverse mortgage becomes your enemy as it silently and invisibly eats away at your home’s equity. Remember they are like insurance in a way.They are designed so the bank wins most of the time.Unless you reverse mortgage and live in the house a long time so essentially there is nothing left and you don’t need extra care you may win as the principal + interest is more than what the house is worth.A relatively rare event I’m sure. My advice if you do is don’t take it all at once.Take a lump sum and then monthly payments .It will reduce the interest accumulated over the life of the mortgage.

    Reply

  2. Most people forget that the home value increase over time which offsets some it not all of the interest that accrues. Downsizing to a condo is not always the best option as strata fees and those nasty Special Assessments can destroy savings. Assets which include the home should all be looked at for funding retirement. It’s about creating the optimal tax efficient cash flow.

    Reply

  3. You can get a home equity line for the value of about 70% of your house at prime or prime plus 1/2%. It is set up so you can just to transfer from it to a checking account as you need it, you do have to pay the interest every month. I believe you have to be employed when it is set up..

    Reply

  4. I think this is the biggest rip off the banks have ever come up with. Banks are the main reason the economy is in such bad shape!!!! They don’t give a shit about any one or anything except there profits!!!!!

    Reply

  5. In the case mentioned, since the person has no company or outside pension and since he is receiving CPP and OAS, when he stops his part time commission work would he not also qualify for GIS?

    Reply

Leave a comment

Your email address will not be published. Required fields are marked *